After beating estimates twice in a row, Career Education (NASDAQ:CECO) fumbled pretty badly last quarter, with earnings that fell more than 50% below Wall Street's curve. But did the for-profit educator do enough extra credit work during its third quarter to make up the difference? We'll find out when it reports Monday afternoon.

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts study Career Education. Four now think it's a buy, but nine more are still voting for a hold, and two say you should sell it.
  • Revenues. On average, the analysts expect to see sales fall 12% to $408.2 million.
  • Earnings. Yet profits may be up a penny to $0.23 per share.

What management says:
The big news at Career Education this quarter has consisted mainly of management changes. In August, CFO Patrick Pesch announced his departure from the firm to -- you guessed it -- "spend more time with [his] family." He's to be replaced by Michael Graham, poached from his perch as CFO of the privately owned Terlato Wine Group. Also joining the company in August was Thomas Budlong, a 23-year veteran of Wrigley, who will become the senior VP for "organization effectiveness and administration." Last but not least, Career Education gets a new chief marketing and admissions officer in the person of Leonard Mariani, who will be hopping over from a VP position at AT&T.

What management does:
Of the three, you have to envy Graham least of all, for he's getting the toughest job of the bunch: turning around a trend of declining gross and operating margins that stretches back more than a year and leaves Career Education badly trailing rivals such as Apollo Group (NASDAQ:APOL), Strayer (NASDAQ:STRA), and ITT (NYSE:ESI) in the margins race. (Mariani, though, also has his work cut out for him. With revenues down 10% year over year last quarter, attracting more students is going to be a crucial goal.)

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

71.4%

71.6%

70.8%

69.1%

67.8%

66.5%

Operating

21.3%

20.8%

18.0%

14.4%

11.9%

10.0%

Net

12.8%

7.4%

5.6%

2.6%

1.4%

4.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Analysts are hopeful that Career Education's new team will be able to turn things around and reverse the declines. Consensus estimates call for 34% earnings growth next year, tapering off to average about 11% per year over the next five years.

As an investor, though, I'd like to see much stronger growth than that -- in fact, I'd need to see much stronger growth, or a much lower stock price, before I'd invest. The firm has generated free cash flow approximately equal to GAAP net earnings over the past year, so valuation is a breeze on this one: With a trailing price-to-earnings ratio of 44 and estimated long-term growth at 11%, the stock looks as much as four times overvalued to me -- that is, it carries a PEG ratio of 4.0. Granted, a successful turnaround could change that growth rate in a hurry -- but at this price, it looks to me as though investors are pretending that the turnaround has already happened.

Need some remedial material on Career Education? You'll find it in:

Fool contributor Rich Smith does not own shares of any company named above. Wrigley is an Income Investor pick. The Motley Fool has a disclosure policy.